Thursday, January 15, 2009

Why The Economy Is Going to Get Worse- A Lot Worse-Before It Gets Better

Why The Economy Is Likely to Get Worse- Much Worse- Before It Gets Better

Dr Mark NaisonFordham University

The news that both Bank of America and Citigroup, the two largest US banks, will need another infusion of US bailout money to stay afloat, is a reminder that the economic crisis we are in is likely to get much, much worse before it starts improving

Many financial analysts had hoped that major banks had already written off most of the bad debt that they had accumulated and would be ready to start lending again to business, consumers and prospective homeowners, but that hope was clearly wildly optimistic.

Not only haven't past obligations been written off bank balance sheets, but a whole new wave of bad debt is about to come due from credit cards and commercial real estate which require another round of federal bank rescues and have a profound psychological effect on already traumatized consumers and a destabilizing effect on whole communities.

During the next six months large number of stores and restaurants, small and large, urban, suburban and rural, are going to go bankrupt and close their doors.The economic impact of these closings is going to be enormous. The owners of the commercial buildings and malls in which these stores are located, deprived of rents, are going to find it difficult to repay the bank loans they received to purchase or construct those buildings. The banks who made those loans are going to have to write them off as bad debt, making it difficult, if not impossible, to make additional loans either to businesses or individuals

But the psychological effect will be as important as the economic effect. Nothing is more demoralizing to a community than to see rows of boarded up stores and boarded up buildings. Not only do abandoned properties invite crime and vandalism, they create an atmosphere of panic and despair among people living nearby. Having lived through the consequences of an abandonment cycle in Brooklyn and the Bronx, and having viewed its consequences in cities from Youngstown to Buffalo to Baltimore, I can tell you from experience, that revitalizing communities hit by such a cycle takes years and years unless government intervention is massive and immediate

What we face , in virtually every section of the nation, represents something of a "perfect storm" of negative economic consequences likely to push the nation into double unemployment rates by this time next year and a prolonged period of economic stagnation no matter what the Obama Administration does

1. A continuing freeze on commercial credit as banks face a new wave of defaults from credit cards and commercial real estate

2. Continued layoffs in the private sector, particularly retail sales and manufacturing, as consumer spending continues to dry up

3. An additional wave of layoffs in the public sector as governments are forced to drastically cut their budgets because of declining tax revenues and in non profit organizations as their funding from government, foundations and individual donors shrinks

4. An imposition of higher taxes, tolls and fees by state and city governments desperate to fund their operations even after they have made draconian cuts in their operations In NY, this means higher tolls of bridges, higher subway fares, and higher tuition in the city university

This of what this means from the viewpoint of the average American worker, consumer, or student. Fewer jobs, lower wages, higher taxes, declining home prices, shrinking pensions and new fees on all forms of transportation. At a minimum, this array of economic trends will force people to hunker down and avoid spending money on anything other than necessities. But when you couple this with the specter of abandoned houses, empty storefronts and shopping centers, half completed skeletons of buildings rising Why above city streets, and groups of unemployed people crowding train stations bus terminals and other public places, you will begin to imagine the crippling blow to consumer self-confidence that is about to fall upon an already fearful American public